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Recent decisions regarding the whistleblower provision of the Sarbanes-Oxley Act

Section 806 of the Sarbanes-Oxley Act of 2002 (the “Act” or “SOX”) protects employees of certain public companies who “blow the whistle” on their employers by reporting conduct that they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. A number of important decisions have been handed down by federal courts recently, addressing the key issues of arbitrability of SOX claims, when an employee is considered to have engaged in “protected activity” under the Act, whether an employee who accepts an offer of judgment is entitled to his/her attorneys’ fees and costs under the Act and the Act’s statute of limitations. In addition, recent decisions have addressed the binding nature of the Department of Labor’s (“DOL”) findings under SOX in a subsequent lawsuit involving the same issues, and an employer’s burden of proof in attempting to avoid liability under the Act.

Second Circuit Finds SOX Claims are Subject to Mandatory Arbitration

Under the Act, a complainant can file an administrative complaint with the DOL. If the DOL has not issued a final decision within 180 days of the filing of the complaint and there is no showing that there has been delay due to the bad faith of complainant, the complainant may bring a de novo action in a United States District Court. In a key decision issued by the United States Court of Appeals for the Second Circuit, a former director of internal auditing who claimed that Aetna fired her in violation of SOX was required to pursue her SOX claims in arbitration rather than court. Guyden v. Aetna Inc., 544 F.3d 376 (2d Cir. 2008).

In Guyden, the employee signed several documents by which she agreed that any disputes relating to her employment with Aetna would be resolved by arbitration rather than in court. Notwithstanding these agreements, the employee argued that compulsory arbitration of SOX claims would be inconsistent with the policy objectives of the statute — to vindicate the complainant’s rights and to bring the alleged irregularities to the attention of company directors and shareholders and to public investors. The court disagreed, holding that the primary purpose of SOX is to provide a private remedy for retaliation against an employee — not to publicize alleged misconduct by a corporation. Additionally, the court found that provisions in the arbitration agreement that limited discovery, required confidentiality of the proceedings, and required an abbreviated decision (rather than a full opinion) did not prevent the plaintiff from vindicating her statutory rights. Accordingly, the court compelled arbitration of the whistleblower claims.

Protected Activity Under the Act

Section 806 of the Act prohibits retaliation against an employee who reports any conduct the employee reasonably believes constitutes a violation of (1) federal criminal law provisions prohibiting mail, wire or bank fraud; (2) any rule or regulation of the Securities and Exchange Commission; or (3) any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). Protected activity under the Act includes complaints made to the employee’s supervisor or other persons with investigative or disciplinary authority, as well as assistance provided to a federal regulatory or law enforcement agency. To qualify as having engaged in “protected activity” under the Act, a whistleblower must establish by a preponderance of the evidence that he or she had a reasonable belief that the acts complained of violated the laws specified in the Act.

In a longstanding dispute, the Fourth Circuit Court of Appeals did not extend the protection of the Act to an airline employee who claimed that she was discharged for complaining that the airline was misusing the procedure by which the pilots’ union reimbursed the airline when its pilots had to miss flights to attend union meetings. Platone v. Dep’t of Labor, 548 F.3d 322 (4th Cir. 2008). Platone complained to her supervisors that the union had failed to satisfy its obligation to reimburse the airline for such occurrences. Shortly thereafter, she was fired for failing to disclose her romantic involvement with a company pilot. She filed a SOX complaint with the DOL, claiming that the airline was involved in a fraudulent scheme to compensate pilots in the hopes of gaining union contract concessions. The court recounted that the Administrative Law Judge (“ALJ”) did not find that Platone clearly articulated her belief of mail or wire fraud to the airline. While Platone alerted her employer to a billing discrepancy, the court held that she “failed to identify to [the airline] why she believed the actions related to the discrepancies would violate securities laws and constitute a fraud.” Therefore, she was denied protection under the Act.

In another long-standing SOX dispute, the United States Supreme Court on April 20, 2009 refused to hear the appeal of a decision that the complaints of David Welch, the former CFO of Cardinal Bankshares Corporation who reported his employer’s allegedly questionable accounting practices, were not protected by the Act. The United States Court of Appeals for the Fourth Circuit had affirmed a decision by the DOL’s Administrative Review Board (“ARB”) that Welch was not engaged in protected activity under the Act because he did not have a reasonable belief that the bank violated any of the laws referenced in SOX. Welch v. Chao, 536 F.3d 269 (4th Cir. 2008). The court agreed with the ARB’s determination that Welch’s complaints — that he was not granted access to the company’s external auditors and that the company maintained inadequate internal controls — did not relate “definitely and specifically” to the enumerated securities laws.

Recently, the First Circuit Court of Appeals refused to extend the protection of the Act to a Staples employee who claimed that he was discharged for complaining repeatedly about the company’s product return practices. Day v. Staples Inc., 555 F.3d 42 (1st Cir. 2009). Kevin Day complained to Staples management that its return practices resulted in inaccurate accounting by overstating Staples’s revenue and denying customers full refunds. Shortly thereafter, he was fired. Day filed a SOX complaint with the DOL, alleging retaliatory termination in violation of the Act. The First Circuit affirmed summary judgment for Staples, holding that Day could not show that he had a reasonable belief that his complaints to Staples’ management concerned alleged intentional violations of federal securities laws. Although a SOX complainant is not required to identify a specific law to claim protection, the court held that “he must have an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and which risked loss.” While “Day may have made a complaint related to consumer protection, . . . he does not have an objectively reasonable belief that there was shareholder fraud,” ruled the court. Therefore, he was denied protection under the Act.

Plaintiff Who Accepted Offer of Judgment is Entitled to Attorneys’ Fees

The Fourth Circuit Court of Appeals recently decided that an employee who had asserted a whistleblower claim under SOX and who had accepted an offer of judgment was an “employee prevailing” under the Act and therefore entitled to his attorneys’ fees and litigation costs. Grissom v. Mills Corp., 549 F.3d 313 (4th Cir. 2008).

In Grissom, the defendant made an offer of judgment of $130,000 under Rule 68 of the Federal Rules of Civil Procedure. Under that rule, a defendant may offer to have judgment entered against it in a specific amount and, if plaintiff does not accept that offer and later obtains a judgment not as favorable as that offer, the plaintiff must pay the defendant’s costs after the date of the offer. Mills Corp.’s offer of judgment specified that the amount offered did not cover any attorneys’ fees or costs incurred by the plaintiff.

Section 1514(c) of the Act provides that “[a]n employee prevailing” on a claim under the Act is entitled to reasonable attorneys’ fees. The court held that the judgment entered in favor of the plaintiff “created a material alteration of the legal relationship between Plaintiff and Defendant by imposing upon Defendant a legally enforceable obligation to pay Plaintiff $130,000.” Accordingly, the employee was statutorily entitled to an award of attorneys’ fees and costs under SOX.

Statute of Limitations is Triggered by Notice of Termination, Not its Effective Date

SOX requires that a complaint be filed with the DOL “not later than 90 days after the date on which the violation occurs.” 18 U.S.C. 1514A(b)(2)(D). Recently, the ARB held that a director of human resources failed to timely file his complaint under the Act when he alleged that his employer fired him for reporting accounting irregularities and for refusing to participate in defrauding a union. Corbett v. Energy East Corp., DOL ARB, No. 07-044 (Dec. 31, 2008). The employee in Corbett was informed that his employment would be terminated and was given a choice of two possible separation dates. The ARB held that in whistleblower cases, the statute of limitations runs from the date the employee receives “final, definitive, and unequivocal notice” of a discharge or other discriminatory act. In this case, the ARB determined that Corbett had unequivocal notice of his discharge on the date he was told his employment would be terminated and not on the date the discharge actually took effect. Because he filed his complaint with the DOL more than 90 days later, his complaint was untimely.

Carol Tice, a pharmaceutical sales representative for Bristol-Myers, filed a claim with the DOL asserting that sales personnel falsified reports under corporate pressure. An ALJ rejected the allegations, finding that Tice “was terminated for the act of falsifying calls [herself], not for reporting of doing so.” Tice v. Bristol-Myers Squibb Co., No. 07-3977 (Apr. 8, 2009). The ALJ rejected Tice’s SOX claim, finding that she failed to establish that the company’s stated reason for her termination was pretextual. Tice chose not to appeal the ALJ’s decision but pursued Title VII and Age Discrimination in Employment Act (“ADEA”) claims in federal court, arguing that she was fired because of her age and gender. A divided panel of the Third Circuit Court of Appeals affirmed a lower court’s dismissal of Tice’s discrimination claims. Tice v. Bristol-Myers Squibb Co., 2009 WL 943838 (3rd Cir. Apr. 8, 2009). The majority opinion acknowledged that, while the statutory schemes established by Title VII and the ADEA afford employment discrimination claimants the opportunity for court review of an agency’s determinations, SOX was different because the Act “explicitly provided that when the federal agency adjudicates a claim under SOX, that claim is not amenable to collateral attack in any other forum.” The court therefore held that Tice was precluded from challenging the DOL’s finding as to the company’s stated reason for firing her and affirmed dismissal of her claims.

ARB Upholds Bankrupt Firm’s SOX Liability

Recently, the ARB determined that substantial evidence existed to support a finding that Sheila Kalkunte, an in-house lawyer at DVI Financial Services Inc. — a bankrupt institution — engaged in protected activity under the Act and that activity was a “contributing factor in her discharge.” Kalkunte v. DVI Fin. Servs. Inc., DOL ARB, No. 05-139 (Feb. 27, 2009). Kalkunte alleged that she was retaliated against by DVI after she reported financial improprieties to its Board of Directors. The ARB noted that Kalkunte progressed from contract attorney to associate general counsel in a few years, the record did not contain evidence of performance-related issues until Kalkunte began her reports of improprieties at the company, and DVI failed to prove by clear and convincing evidence that it would have discharged Kalkunte had she not engaged in protected activity. Although DVI’s legal department closed its doors in October 2004, the ARB awarded front and back pay to Kalkunte through December 2004 — the date when DVI terminated the very last of its employees — reasoning that “uncertainties in establishing the amount of back pay to be awarded are to be resolved against the discriminating party.”

Compare jurisdictions:Employment: USA

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